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Company Law Assignment 075-126
Company Law Assignment 075-126
ASSIGNMENT NUMBER: 01
ASSIGNMENT BRIEF
Evaluation of the feasibility, obstacles, and ethical ramifications of executing a business rescue
strategy for a financially troubled company, while accounting for stakeholder concerns and existing
legal precedents in Zambia.
Additionally, the formulation a comprehensive plan to effectively rehabilitate the business within
the parameters of Zambia's legal framework.
STUDENT INSTRUCTIONS
1. This form must be attached to the front of your assignment.
2. The assignment must be handed in without fail by submission date (see assessment schedule for your course)
3. Ensure that submission date is date stamped by the reception stuff when you hand it in.
4. Late submission will not be entertained unless with prior agreement with the tutor
Contingency Planning......................................................................................................... 3
BIBLIOGRAPHY .................................................................................................................... 10
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VOLUNTARY BUSINESS RESCUE PROCEEDING AS A RESCUE MECHANISM
FOR BUSINESSES
OBJECTIVES OF A BUSINESS RESCUE
According to section 21 of the Corporate and Insolvency Act at least three objectives of
company business rescue was provided in which they are.
Rescuing the company as a going concern; restoring the company to solvency and thereby
preserving the company and its business operations as a going concern; or Achieving a better
result for the company’s creditors as a whole than would be likely if the company were wound-
up without first being in company reorganisation as in Re Kayley Vending Ltd [2009] EWHC
904 (Ch), which may include a sale or a transfer of any business of the company as a going
concern; and Realizing property in order to make a distribution to one or more secured or
preferential creditors as also stated in Re Trans Bus International Ltd [2004] EWHC 932 (Ch).
The administrator must perform his functions in the interests of the company’s creditors as a
whole1 and follow the three objectives in the hierarchy in which they appear, unless it is not
reasonably practicable to achieve a higher objective. This is clearly in keeping with the most
important reason of the concept of corporate rescue, which is to make every effort possible to
save the ‘life’ of the company before making the decision to turn off the corporate ‘life support
machine (Chimpango, 2017).
To initiate a comprehensive business rescue effort, several critical aspects need careful
evaluation and strategic planning. First and foremost, a thorough financial assessment of the
company is imperative. This assessment should encompass an in-depth review of the
company's financial position, encompassing assets, liabilities, cash flow, and debt levels. It's
vital to analyze the sustainability of the current business model and revenue streams while
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assessing the potential for debt restructuring, creditor negotiations, and securing additional
funding if needed.
An insightful market analysis is fundamental, involving a deep dive into industry and market
trends to gauge growth potential and profitability. Identifying market segments or niches where
the company can gain a competitive edge is key. Anticipating shifts in consumer behaviour,
technology advancements, or regulatory changes that might impact the company's market
position is vital (Johnson, 2017).
Equally critical is ensuring that the business rescue plan aligns with legal and regulatory
frameworks governing insolvency and business rescue. A thorough evaluation of potential legal
challenges and liabilities associated with the business rescue process is necessary to ensure
compliance and mitigate risks.
Management and leadership capabilities within the existing team must be evaluated. Assessing
if external expertise or a business rescue practitioner is needed to guide the process is essential
for successful execution. Establishing a clear timeline with achievable milestones for the
implementation of the business rescue plan is imperative. Regular monitoring of progress
against these goals is essential to stay on track (Morse & Wood, 2019).
Contingency Planning
Lastly, planning for contingencies is prudent. Developing alternative strategies, including
restructuring, asset sales, or other exit plans, in case the business rescue strategy doesn't yield
the desired outcomes, is crucial for a well-rounded approach to business rescue.
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Comprehensive evaluation and strategic planning across these domains provide a strong
foundation for an effective business rescue plan.
In such a situation, businesses have various options for dealing with the creditors. They could
renegotiate debts repayments with lenders by seeking a moratorium on debt service or
restructure the debt, negotiate extended payments terms with suppliers, reduce their workforce,
dispose idle or underutilized assets and/or cut operational costs. On the other hand, depending
on the severity of the distress and the extent of cooperation by creditors, businesses can
consider other statutorily available remedies such as voluntary arrangements and business
rescue proceedings which are intended to support the rescue of viable but financially distressed
businesses. In Zambia, these remedies are codified in the Corporate Insolvency Act No. 9 of
2017. The business rescue proceeding is a key remedy available to struggling businesses under
the Act (Gates, 2019).
In embarking on a business rescue initiative, several financial constraints may pose significant
hurdles. These include a shortfall in funds or an inability to secure necessary financing critical
for supporting the proposed business rescue plan. The insufficiency of resources may impede
the execution of vital changes and restructuring efforts essential for the company's recovery.
Moreover, encountering resistance from creditors is a plausible challenge. Creditors may
oppose debt restructuring proposals or demand unfavourable terms, making negotiations for a
viable repayment plan a complex and arduous process (Gates, 2019).
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The company's environment can also be impacted by market volatility and intense competition.
Unpredictable market conditions, economic downturns, or shifting consumer preferences can
significantly affect revenue generation and the quest for sustainable growth. Concurrently,
operational challenges within the organization may impede the successful execution of the
rescue plan. Internal inefficiencies, outdated processes, a shortage of skilled personnel, or
inadequate infrastructure can hinder progress.
Addressing employee concerns and morale is crucial. Resistance from employees due to fears
regarding job security, role alterations, or uncertainty about the company's future can pose a
considerable obstacle. Legal and regulatory complexities are additional hurdles that need to be
navigated. The intricacies associated with legal processes and compliance issues related to
business rescue proceedings can potentially delay or impede the timely execution of the rescue
plan.
Stakeholder dynamics can add to the complexity. Disagreements or conflicts of interest among
shareholders, management, creditors, or unions regarding the optimal recovery path for the
company can further complicate the process. Inadequate leadership, expertise, or experience in
implementing a successful business rescue plan is another significant challenge. This often
necessitates involving skilled professionals or experts in turnaround management to drive the
rescue initiative effectively (Chimpango, 2017).
Lastly, communication and transparency play a critical role. A lack of effective communication
or transparency in conveying the details and benefits of the rescue plan to stakeholders can
result in confusion or mistrust. Addressing these potential challenges proactively and
strategically is vital for a well-rounded and successful business rescue endeavor.
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the appointed business rescue administrator given a business rescue administrator’s expansive
power under the Act.
A business rescue proceeding can provide an entity with a conducive environment to re-
organise its affairs without the threat of enforcement by creditors because a key provision of
the Act is a moratorium which prohibits enforcement actions against a company by its creditors
unless approved by the appointed business rescue administrator or the courts. This relief can
enable a business to continue operating without threat of winding up proceedings which can
distract management from their day-to-day functions.
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Wrongful trading is where a company continues to trade at a time when there is no reasonable
prospect of avoiding an insolvent winding up. On the other hand, fraudulent trading arises
where directors knowingly carry on a company’s business with the intent to defraud creditors
by incurring credit that a company cannot repay. It is critical for directors to consider these
aspects in evaluating the various rescue options available to a distressed company.
(i) secure the cooperation of all major stakeholders (secured and unsecured creditors,
directors, employees)
(ii) take action early in making the business rescue decision. From our experience,
delayed action and conflicting stakeholders’ interests are some of the common
pitfalls bedevilling business rescue appointments in our jurisdiction.
Background information
Part A is dedicated to providing essential background information that lays the foundation for
understanding the company's current position. It entails a comprehensive listing of significant
company assets, distinguishing those held as security at the initiation of the business rescue
proceedings. Additionally, it includes a detailed inventory of creditors at the onset of the
proceedings, categorizing them based on their security status - secured, statutory preferential,
concurrent, or unsecured. The anticipated dividend for each class of creditors, assuming the
company undergoes liquidation, is also outlined. Moreover, this section encompasses an
exhaustive list of holders of the company's issued securities, along with pertinent agreements
regarding the business rescue administrator's remuneration. Notably, it discloses whether the
business rescue plan incorporates any informal proposals from creditors and elucidates the
rationale behind the business rescue administrator's compensation structure (Gates, 2019).
By meticulously structuring the business rescue plan with such comprehensive details in Part
A, it ensures that stakeholders have a thorough understanding of the company's financial
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standing and the context within which the business rescue plan is formulated. This clarity is
fundamental in aiding stakeholders to effectively assess and make well-informed decisions
concerning the proposed rescue plan.
Firstly, it delineates the nature and duration of any moratorium that the business rescue plan
intends to institute, providing a crucial aspect of the plan aimed at stabilizing the company's
financial situation. (Sealy & Worthington, 2018) Secondly, it outlines the extent to which the
company will be relieved from its debt obligations and the possibility of converting a portion
of the debt into equity in either the company itself or another affiliated company. This addresses
debt restructuring and equity allocation, critical components of the rescue strategy (Johnson,
2017).
Moreover, Part B delves into the ongoing role of the company and outlines how existing
agreements will be treated during and after the business rescue process. It then defines the
allocation of the company's assets to satisfy creditors' claims, establishing a framework for
equitable distribution. The order of preference for utilizing the proceeds from the company's
assets to pay off creditors, if the business rescue plan is adopted, is also elucidated.
Furthermore, this section provides a comparative analysis, contrasting the benefits of adopting
the business rescue plan with the outcomes that would arise if the company were to undergo
liquidation. Lastly, it explicates the implications the business rescue plan would have on the
holders of each class of the company's issued securities, ensuring transparency and clarity
regarding the impact on various stakeholders.
Part B, by detailing these proposals, offers a comprehensive view of the intended actions and
their potential outcomes, aiding stakeholders in evaluating the viability and benefits of the
proposed business rescue plan. This informed assessment is crucial for making sound decisions
that align with the company's path to recovery.
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Firstly, it clearly defines the conditions that must be met to set the business rescue plan into
motion and ensure its effective execution. This includes a precise statement of the prerequisites
that pave the way for the plan to be fully operational. Additionally, it addresses the potential
impact of the business rescue plan on the company's workforce, elucidating any alterations in
the number of employees and their terms and conditions of employment resulting from the
plan's implementation.
Furthermore, Part C outlines the circumstances under which the business rescue plan may
terminate. This information is crucial for stakeholders to anticipate the duration and possible
outcomes of the business rescue process. Lastly, the section presents a forward-looking
financial projection for the next three years, based on the assumption that the proposed business
plan is adopted. This projection offers a glimpse into the expected financial trajectory, aiding
stakeholders in evaluating the plan's long-term feasibility and potential outcomes (Gates,
2019). By encapsulating these assumptions and conditions, Part C enhances transparency and
clarity regarding the critical factors that underpin the business rescue plan. This empowers
stakeholders to assess the plan comprehensively, foresee potential impacts, and make informed
decisions that align with the company's trajectory towards recovery and sustainability.
CONCLUSION
In conclusion, the concept of business rescue, as enshrined in the Corporate Insolvency Act of
Zambia, holds paramount importance in preserving and revitalizing financially distressed
businesses. The three key objectives outlined in Section 21 of the Act rescuing the company as
a going concern, restoring solvency, and achieving a better outcome for creditors — underscore
the emphasis on safeguarding the company's viability and stakeholders' interests. The
feasibility of a successful business rescue strategy hinges on a thorough evaluation of financial,
operational, market, and legal aspects. By crafting a comprehensive business rescue plan that
adheres to Zambia's legal framework and incorporates critical background information,
proposed strategies, and pertinent assumptions, businesses can navigate challenges, secure
stakeholder cooperation, and set the stage for a robust recovery, ultimately reinforcing the
foundation of the Zambian business landscape. However, businesses must be mindful of the
potential obstacles and legal responsibilities associated with implementing a business rescue
strategy, striving for effective communication, transparency, and stakeholder engagement to
foster a collaborative environment conducive to the successful rehabilitation of the business.
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BIBLIOGRAPHY
1. Chimpango, B., 2017. The Insolvency Act 2016: Towards Embracing Corporate Law.
1st ed. London: Chase Cambria.
3. Johnson, S., 2017. Business Restructuring and Insolvency. 2nd ed. London:
Cambridge .
4. Morse, G. & Wood, P., 2019. Wood's Principles of Company Law. 1st ed. London:
Sweet & Maxwell.
5. Sealy, L. & Worthington, S., 2018. Sealy & Worthington's Cases and Materials in
Company Law. 1st ed. Oxford University: London.
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